Let me say right from the start the any moving average swing trading strategy, including this 34 EMA trading strategy (this is not an EMA crossover strategy, relies on a lagging technical indicator.
As such, using something other than a derivative of price such as price itself, we can combine the best of both worlds:
- An objective view of an ongoing trend stopping us from attempting to pick extremes
- Seeing what the market is actually doing before price is calculated with the moving average
No matter what Forex swing trading strategy you are using, I will always hit home the importance of risk management. If you loose all your chips, you go home.
Requirements For The 34 EMA Trend Line Strategy
You will need to plot a 34 exponential moving average on your chart. That is simple to do and if you are having any issue, consult the user manual of your charting platform.
Ensure you have a rule based method of drawing a trend line. You must be consistent with all aspects of your trading.
You can use any currency pair you choose.
Time frames will depend on you as a trader but I prefer daily charts for swing trading any strategy. This allows me to not be glued to the trading charts or be at the beck and call of alerts being sent to my phone.
That said, you can use any time frame from 1 hour and above. This can be a short-term trading strategy but that all depends on the run the market makes.
- You can swing trade which is simply taking one clean swing out of the market and not tolerating any retrace in your position.
- You can position trade taking advantage of the current long term trend and wait until an opposing trading signal to exit.
Only you can determine the type of trader you are. These swing trading strategies are designed for you to experiment with and hopefully you will find one that sticks. It could be a trend trader or swing trader. Can you live through wild swings in the market? Forget trend trading.
You can determine the long term trend simply by increasing your trading chart 3-5 times such as daily – weekly long-term trend. Four hour would be daily chart.
What Is The Trading Edge
Moving averages are generally used as an objective measure of trend. An up sloping trend line indicates an uptrend and the down sloping line is a down trend. We can also use the break of the moving average to determine trend.
One price breaks above the moving average, we are looking at longs.
A break below a moving average (in this strategy it is the 34 EMA) indicates a down trend.
We are introducing the very popular technical analysis tool called a trend line. Trend line breaks are a very common trading strategy and we are going to utilize the trend line break as a way of showing a change of character in the market.
When a trend line breaks, traders look to position on the break or a retrace to test the backside of the trend line. We want to trade a break only if the trend line break happens in the same area as a break of the 34 EMA
This is a semi-mechanical trading strategy where either the trend line is broken, or it isn’t. Is the 34 EMA crossed or not? Not much guesswork involved.
34 EMA Trend Line Strategy
The following is a daily chart of a Forex pair showing two buy setups. Shorts are the exact opposite. Stops and targets have not been plotted.
The first trade setup is #1. You can see I’ve connected the obvious peaks of price that broke lows. A down sloping trend should not connect a lower peak if the low of that peak has not broken lower than the previous (mechanical trend line drawing tip!)
Price does break above the trend line but takes 3 more candlesticks to break above the 34 EMA. We have confirmed:
- The current swing down has been broken and we are looking to trade a trade long
- The down trend has been broken upon the breach of the 34 EMA as indicated by the arrow. That is our entry candlestick.
This trade did not run very far and I will show later that you would have still made a profit on it. I will show two methods to take your profit targets.
Our second trade is #2. The last green circle is simply highlighting that the trend line still interacted with price weeks after it was drawn.
A huge candlestick takes out both the moving average and the trend line as indicated by the arrow.
Stop Loss And Take Profit Targets
The stop loss is straight forward. You enter at the close of the valid candlestick (the ones with the arrows) and place your stop below the low of it. Your stop loss will vary depending on the size of the candlestick that validates the setup.
If the candlestick is much smaller than the candlesticks before it, you may opt to use a 2 or 3 bar stop instead of below the valid candlestick.
This chart is showing where you would place your stop. If your stop lies just above (or below for shorts) a consolidation of price, you may decide to protect the stop below the cluster. That will increase your stop size and reduce your position size so be warned.
The chart also shows structural resistance price targets other wise known as support and resistance. Those will depend on the overall trend of the market and how aggressive you want to be at these price points.
This next chart shows a different way to take profits – Fibonacci extension levels
As shown by the arrows, you draw a normal Fibonacci retracement level but you also have extension levels activated. I use the following:
- 1.272
- 1.618
- 2.0
- 2.618 (rarely)
You want to use obvious swings to draw your Fib and even is you used the full swing down on the first trade, you would still monitor price action at resistance. Our first trade eventually rejects slightly below the 1.618 level for an approximate profit of 174 pips. A decent R multiple of 1.46
The second trade is using the full pull of the swing down. There is not an obvious swing level other than the original pivot. I want you to note the top of the chart at the 2.0 level. Price stalled directly at that level!
A conservative 1.272 profit target on this 34 EMA swing trade gives you 572 pips with a great R multiple of 2.29. If you didn’t get spooked out of the trade during the sideways consolidation (note that the price action is still bullish and did not close below 34 EMA with any conviction), your R multiple is 4.5 with a profit of 1142 pips potential
How Can You Manage Your Swing Trade
This trading strategy gives you targets so you can decide to do a few things at each target:
- Scale partial position at Fib extension levels or structure points
- Tighten the stop level to reduce your capital exposure
- Full exit depending on price action at these levels
Trailing your stop can be done using an ATR trailing stop which will take into consideration the current volatility of the market.
You can trail your stop behind structure or bring your stop to break even when you hit 1R and just wait until a profit target is hit or an opposing trade sets up.
You will have to find a method of stops and targets that you are comfortable with. Nobody knows what is right for you….except you.
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